Facebook pulled in $1.2 billion in revenue over the first nine months of 2010, according to a report citing documents distributed by Goldman Sachs, which is offering Facebook equity to some of its wealthiest clients.
Facebook's net income during the first nine months of 2010 reached $355 million, Reuters reports. Goldman values …

Congrats!

"Faceslap" may be a pile of wotnot and I'd rather not have to put up with Zuckerberg in the news every 5 mins, but you have to hand it to these guys. There's never been a better time to tap that "one born every minute" market, especially when you're pulling down the green to that extent!

What advertising? I don't get where their money comes from?!?

So, I as most do now do use Facebook via there mobile - in my case Android app or FriendStream or via the mobile website. None of those have any advertising at all.

The main website, that I rarely look at, has 3 or 4 small ads down the right hand side which are usually the same or advertising FB features.

If advertising in its currently form is generating est $1.6b a year then if they really started advertising then they must be worth trillions not billions!

It just doesn't add up to me, I know they have the mother of all user bases but they have naff all advertising covering only a percentage of that userbase at present. And even if they did ramp up their advertising, does online advertising really generate that much cash?

Does there income really come from those few tiny ads only shown on the main FB website?

NFT required

Just to state the obvious, since no-one's done it yet. If these figures are to be believed, then:

- FB is pulling in about $3.20/year advertising revenue per punter

- maybe only half of these punters are in geographic areas that are of interest to advertisers, so these ones make about $6/year

- each of these punters is clicking through once every 2 or 3 weeks, assuming 30c per click-through

- each punter costs FB $2.25/year. This seems a bit low. I guess a lot of people don't use the servers much.

- a valuation of 50B, with an annual net income of 500M, might give a P/E of about 100. According to Wikipedia, "Since 1900, the average P/E ratio for the S&P 500 index has ranged from 4.78 in Dec 1920 to 44.20 in Dec 1999, with an average around 15."

- new investors have to expect FB's income to increase by at least 100/15 = 6.7 to make sense of a $50B valuation

- I can't see FB getting a lot more than 500M users, so each user will have to generate about $21.50 in revenue, instead of $3.20. Again, assuming that only half of users are of interest to advertisers, that comes to $43 per interesting user

- So, either (1) each interesting user has to increase their click-through rate from 20/year to 134/year,

- or, (2) advertisers have to be willing to increase their payment from 30c to $2.00 per click-through,

- or, (3) users must be willing to fund this valuation themselves, by paying an annual subscription of maybe $20.

Of these, (3) looks far and away the most likely. Still, I don't get it. Once FB starts charging everyone else will jump in with their own sites. Anyone who buys in at this price has to be a teensy bit dumb.

I'm with Anonymous Coward

From the adverts I've seen they're all either Acai Berry Scams, Getting Ripped in 4 weeks or the usual rubbish I see in Spam e-mails. Considering I usually have Adblock Plus enabled I will never see any of these adverts. That is also true of Google.

I can't see why any investor would consider Facebook to be worth more than say Ebay.

Ebay have a proven business model and make money (around 10%) on every sale. They're overheads must be some of the smallest of any online business, no warehouses, no factories, just a huge data centre.

Noooot quite ...

Excellent analysis, except for your final point and final sentence: "Anyone who buys in at this price has to be a teensy bit dumb."

All investors have to believe is that they will, at some point, be able to sell their Facebook equity for a greater amount, which means that they need to find someone dumber than them, which will probably be fertile ground once Facebook goes public. This principle is called the Greater Fool theory and is basically the foundation of modern investment. Extrapolating that principle to an understanding of the boom-and-bust cycle of the stock market is trivial and left as an exercise for the reader.